A free-market solution for drug shortages

Curt I. Civin and Stephen C. Schimpff

Hospitals nationwide are experiencing shortages of critical generic intravenous drugs. We believe a fundamental reason for this national shortage is government price controls. With these limits, there is little incentive to invest in new facilities and technologies, leading to equipment failures. Manufacturers have little economic incentive to prepare for the quality assurance issues that routinely arise in the manufacturing of a sterile injectable compound.

To reincentivize this process, the market needs to be free, spurring more manufacturers to produce these drugs, and encouraging reinvestment in facilities and the stockpiling of reserves.

The drugs in shortest supply include those used in critical care units, such as norepinephrine for shock, antibiotics for infections and cancer chemotherapy. Almost all are generics and manufactured by a just few companies. Among the oncology drugs in short supply are cytarabine (the best drug for acute myeloid leukemia) and leucovorin, used in childhood acute lymphoblastic leukemia. These are older, "off patent" drugs. As generics, they are far less expensive that newer drugs. They have stood the test of time, are still used extensively and are necessary for optimal patient care.

Individual patients need exactly the right drugs on precisely the right schedule — no substitutes; now, not later. As pointed out in congressional testimony and a Wall Street Journal editorial, these shortages are having a major negative impact for ongoing clinical trials designed to improve cancer treatment results.

Another critically needed cancer drug is Doxil, used to treat many cancers. It is sold by Johnson and Johnson (J&J) and until recently had been manufactured on contract by Ben Venue Laboratories. Unfortunately, Ben Venue is exiting the contract drug business. Thus, Doxil is not currently available.

Prior to 2003, Medicare paid for cancer chemotherapy injectables based on the average wholesale price. But with no transparency, some distributors or physicians could reap huge profits. To combat this, and with the best of intentions, a new system was developed as part of the Medicare Modernization Act of 2003, based instead on the average selling (retail) price, updated quarterly. Oncologists, who purchase the drugs from distributors and then administer them, are reimbursed the average selling price, plus a 6 percent administrative fee. This would at first glance seem perfectly reasonable. Not quite. In effect, it means that Medicare allows a maximum of only a 6 percent increase per year; any more, and the reimbursement would be less than the cost.

In the generic drug business, prices can decline tremendously. If the price drops too low, some manufacturers simply cease producing it and use their capacity to make other, more profitable, drugs. The remaining producers cannot raise their prices more than 6 percent, so they have little incentive to make up for lost capacity by investing in new plants or equipment. The system has broken and needs to be fixed soon — or patients will die.

President Barack Obama recently signed an executive order requiring manufacturers to notify the Food and Drug Administration at least six months in advance of discontinuing a critical injectable sterile medication. This will be useful in a few situations, such as Doxil, but it will be of little help when companies must suspend manufacturing immediately due to finding a contaminant, having an equipment breakdown, etc. The New York Times called the president's measures "useful first steps" but emphasized that Congress needs to take up long-stalled legislation. We agree but believe that the legislation needs to focus on raising the profit margin allowed under Medicare. This could be done by permitting the marketplace to set the value of these critical drugs in a transparent manner.

Concurrently, oncologists should be paid an appropriate administrative fee based on the time and effort required per specific drug, rather than a flat percentage of the cost. This would eliminate the temptation noted recently in the New England Journal of Medicine to substitute a more expensive drug (6 percent of a higher-priced drug means a greater income than 6 percent of a lower-cost drug).

With our recommendation, prices will still be very cheap compared to on-patent drugs, yet they will rise to the point sufficiently profitable for the generic producers to invest in their manufacturing capacity, create redundant production lines and encourage more manufacturers to enter the marketplace. Combined, these changes will reduce quality control issues, create backup options, and maintain a stable supply of these vital drugs for the patients who desperately need them.

Dr. Curt I. Civin, writing in his personal capacity, is professor and associate dean for research at the University of Maryland School of Medicine. Dr. Stephen C. Schimpff (schimpff1@gmail.com) is professor and former CEO of the University of Maryland Medical Center and author of "The Future of Health Care Delivery," out in February from Potomac Books.